Newspaper article The Christian Science Monitor

Germany Will Join 1994 World Recovery

Newspaper article The Christian Science Monitor

Germany Will Join 1994 World Recovery

Article excerpt

LAST year, world output of goods and services grew a bit more than 2 percent - modest indeed considering population growth. The volume of world trade rose less than 3 percent, down from 4 percent the year before.

But 1994 will be better economically, economists predict.

In the United States, the recovery already has become more vigorous. Contrary to conventional wisdom, writes Lawrence Kudlow, chief economist of Bear, Stearns & Co. in New York, the Federal Reserve's small hike in short-term interest rates last Friday will quicken, not restrain, economic activity.

"Why?" Mr. Kudlow asks. "Because consumers and businesses will now shift interest expectations, including loan financing costs.... Many have been waiting for lower interest rates and loan costs. After {the} Fed action, they will no longer wait. Consequently, spending decisions will be accelerated, and first-half economic growth will likely be stronger."

The economies of both Canada and Britain are recovering. And, says Martin Hufner, chief economist at Bayerische Vereinsbank AG in Munich, Germany, continental Europe will emerge from recession in the second half of 1994. He's expecting the western German economy to grow 1 percent after inflation this year, and eastern Germany 7 to 8 percent, adding up to about 1.5 percent for all of Germany. The jump in the number of jobless German workers to above 4 million, a postwar record announced Tuesday, was not surprising, he says.

Japan's output will be flat, with recovery not coming until the end of 1994, Dr. Hufner forecasts.

Japanese Prime Minister Morihiro Hosokawa this week negotiated a $140 billion fiscal stimulus plan equivalent to 2.2 percent of total national output, including a $50.3 billion cut in income taxes. Yet there is considerable skepticism that the package will revive the economy.

One reason is that the tax cut is for one year only. "If economists know anything with certainty, it is that a tax cut that is announced as a temporary measure has no affect on people's assessment of their permanent incomes, and thus it is almost totally ineffective in stimulating demand," notes Carl Weinberg, chief economist at High Frequency Economics in New York. …

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